Next Meeting of the Scarlet Kings

Greetings to All,

The next meeting of the Scarlet Kings will be held on

Sunday, November 1st, 2009 at 1:00PM.

Location: Blue Mesa Grill (5100 Beltline Road, Addison, TX)

Please join us for a fruitful and lucrative discussion!

Very Sincerely,

VJ

Lessons from Jesse Livermore - One of the Greatest Speculators of all Time

(The following excerpts were taken from Edwin Lefevre's Reminiscences of a Stock Operator)

On the importance of selective speculation: There is a time for all things, but I didn't know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is a plain fool, who does all the wrong things everywhere, but there is the Wall Street fool, who thinks that he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily - or sufficient knowledge to make his play an intelligent play. (p.21)

On markets and their participants: But the one thing a Stock Exchange firm will not do is to split commissions. The governors would rather a member committed murder, arson, and bigamy than do business with outsiders for less than a kosher eighth. The very life of the Stock Exchange depends upon their not violating that one rule. (p. 47)

On mistakes and wisdom: If a man didn't make mistakes he'd own the world in a month. But if he didn't profit by his mistakes he wouldn't own a blessed thing. (p. 97)

Of course, if a man is both wise and lucky, he will not make the same mistake twice. But he will make any one of the ten thousand brothers or cousins of the original. The mistake family is so large that there is always one of them around when you want to see what you can do in the fool-play line. (p. 119)

A man can excuse his mistakes only by capitalizing on them to subsequent profit. (p. 147)

On the speculator and his emotions: I sometimes think that specultion must be an unnatural sort of business, because I find that the average speculator has arrayed against him his own nature. The weaknesses that all men are prone to are fatal to success in speculation - usually those very weaknesses that make him likable to his fellows or that he himself particularly guards against in those other ventures of his where they are not nearly so dangerous as when he is trading in stocks or commodities.

The speculators' chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when a the market goes against you, you hope that every day will be the last day. It is absolutely wrong to gamble in stocks the way the average man does. (p. 130-131)

Meeting Minutes

We had a great time at our meeting today! I want as always to thank everyone for coming and making for a conversation that was to be remarkable. There were many potential market plays so I have decided to devote an adequate section to each play below with a corresponding chart. We had a total of 7 attendees: (from left to right) Kay Olds, Phil Garcia, Earl Landry, Tommy Schultz (who came later one), VJ Arjan, Jeff Harrington, and Kevin Day.

The following market plays were given by Kevin Day, Jeff Harrington, and Phil Garcia:

CIT Group Inc. (CIT)

Kevin Day and Jeff Harrington were expressing their belief that this company is “too involved” to fail. We will find out this week whether this company will live or die depending on the agreement that is reached with the bondholders. As this company provides short-term lending for 60% of retailers, one can make a plausible argument for its survival. Jeff Harrington is wary of its survival, however, as the agreement with the bondholders is for them to hold equity stakes in the company. An enormous dilution of shares would result and the hypothetical ceiling, Jeff thinks, for this stock should be its historical high adjusted for shares outstanding.

Gold – Yamana Gold Corp. (AUY), SPDR Gold Trust (GLD)

Phil thinks that gold could make a breakout of the $1,000 an ounce level. He thinks the chart has been in the consolidation phase for a while is ready for a upward break. He and VJ Arjan both have owned AUY and may expect to profit more should this occur.

Santa Fe Gold Corporation (SFEG)

As can be seen in the chart, this stock has exploded in share price and volume in the past week, climbing 30% in the last week alone. Kevin Day was expressing the incredible growth potential for this stock. There are 80 million shares outstanding. He knows at least 20 owners of this firm who hold at least 1 million shares. The CEO, Pierce Carson, owns some more millions of shares. The exits, therefore, are blocked. This company has been waiting for a water permit to be secured for production and it is a likely buy-out candidate, perhaps Barrick Gold Corporation or Neumont Mining, etc.

Novovax (NVAX), Vical Corporation (VICL), Cel-Sci Corporation (CVM)

Jeff Harrington was expounding his idea of how to play the swine flu phenomenon. Novovax had been trading in the $3s before he picked some up and it proceeded to $6.50. Recently, the company announced more shares to be issued and this stock has fallen 50% to $3.43 as of Friday’s close. Jeff thinks that this is share issuance has led many investors to believe that the share price is too high, leading to a sell-off, in other words, a market over-reaction. The health minister of Spain and India, both of whom have been affected by the swine flu, have backed Novovax for the production of the swine flu vaccine. There is currently, 11 million shares of short interest, and these will have to cover. The prospects and profits for NVAX, VICL and CVM look bright.

Utility Stocks (Duke Energy, etc.)

Jeff Harrington spoke about how he thought dividend-paying stocks have lagged non-dividend paying stocks in this rally and as a correction may be in the near-future, the enormous $4 trillion of money that is on the side lines may proceed to enter into these dividend-paying stocks. He especially likes Duke Energy which currently yields 6.25% (5 times as much as mutual funds are able to get in the money market). Add to this a book value of less than 1, and there is a possibility of great potential here.

Genworth Financial (GNW)

Kevin Day had picked up this stock when it was trading in the pennies. Currently it is at $11.32 per share and he believes, with a book value of $23, there is still potential to the upside.

Banks - Bank of America (BAC), Wells Fargo (WFC)

Jeff Harrington especially likes bank stocks as they are considered undervalued according to the business cycle theory (sell banks during booms and buy banks during recessions). BAC, he believes, will be a financial powerhouse in the years to come with its acquisition of Countrywide Home Loans and Merrill-Lynch. Wells Fargo will be the number 2 servicer, albeit the bad PR it received recently with the executive throwing lavish parties in foreclosed properties. Jeff is specifically looking for a breakout from the $30 a share range.

Interest Rates

“When interest rates are low, stocks will grow; when interest rates are high, stocks will die.” – Phil Garcia

The probability is that interest rates will increase in the near-future as we climb out of this recessionary period and proceed to the expansionary phase. Jeff Harrington believes that interest rates are follow a 40-year cycle and that currently they are at the lows, or a new cycle is beginning. He is also expecting the next pullback on the DJI to be about 500 points, but still a bull market. He is noticing that companies are building up substantial cash positions as they continue to lay off employees. There is also an increase of merger and acquisitions that are leading to more money for company coffers. It may be recalled that in the last month, Dell acquired Perot Systems and Xerox acquired Affiliated Computer Services. There will be, therefore, a “jobless recovery” due to companies focusing on core businesses and mergers and acquisitions.

What Moves the Market?

We listened into a debate today between Jeff Harrington and Phil Garcia about how to best profit from the market. Jeff Harrington explained that principally the competitiveness of a company’s position in the market, the market environment, and the analysis of its cash flow and balance sheet position should determine one’s interest. On the other hand, Phil Garcia, who made his money of Yahoo and Dell believes that it is good to look at price levels and not to analyze too much before making an investment decision so as not to fall prey to ‘analysis paralysis’.

Both sides made very compelling arguments and the conclusion we came to as a group was that each person may have a different and personalized investing style and each one may be successful. Of course, both Phil and Jeff are enormously successful investors and traders, so suffice it to say that each one’s style has definitely worked for them. If one is curious to follow the dialogue of this interesting debate, it will be located between minutes 47-55 in the audio recording of the meeting, the link to which is given below.

The Stock Recommendation

Oftentimes we hear an “expert” on Bloomberg state that he or she thinks a certain stock or commodity may be going up or down. Some may make money by following such advice, some may lose. But the key, according to Phil Garcia, is how long is the timeframe for the recommendation. In other words, one may be long or short the market, but it can mean a world of difference if it pertains to the long or short-term. Phil, it may be recalled, made his money riding the tech bubble and selling close to the top. He made, in truth, more money in a few years that may have taken someone else decades to make. At this point, Jeff Harrington brought up Joe Kennedy’s quote that when he hears the shoeshine boy advising him of stock recommendations, one needs to sell immediately.

Protective Measures

Phil Garcia was explaining how he has seen many persons lose fortunes due to their lack of protective measures to retain their profits. Phil, therefore, does not forecast the direction of certain stocks or even give recommendations for certain situations for he feels them to be personalized and suitable to himself alone. One must, however, learn to protect ones profits as the market has the reputation for giving many a man a good lesson for relying upon its arrogance.

Danger in the Middle East

We brought up briefly whether it was of danger that Iran was possibly developing the capability of nuclear weapons. Kevin Day explained that this was certainly not an idle threat and it was very possible that Iran would decide to take matters into its own hands in reference to Israel. This, should it happen, would mean the literal wiping off of Iran from the map of the world for minutes after the attack, they would be showered by atomic bombs in the hundreds. It is a precarious position no doubt for Iran to be in, and it should be of great concern to the world powers that this capability be eliminated due to the radical fundamentalism of Iran’s leaders.

Simulated Portfolio

Date	Security	Entry	Current Price	Profit/Loss
October 4th, 2009	FXI (iShares FTSE/Xinhua China 25 Index	$25.16	$40.10	$1,493
October 4th, 2009	ILF(iShares S&P Latin America 40 Index)	$26.60	$42.45	$1,603
October 4th,2009	EWZ(iShares MSCI Brazil Index)	$37.69	$67.61	$2,999
October 4th, 2009	PBJ(PowerShares Dynamic Food & Beverage)	$13.27	$13.71	$44
July 12, 2009	GUR (SPDR S&P Emerging Europe)	$29.74	$38.94	$920
October 4th, 2009	FCX (Freeport-McMoRan Copper & Gold Inc.)	$29.06	$66.34	$3,688
October 4th, 2009	WLT (Walter Industries – metallurgical coal)	$38.75	$55.92	$1,644
October 4th, 2009	RIO (Companhia Vale do Rio Doce – gold mining)	$13.12	$23.19	$1,000
October 4th, 2009	GVA (Granite Construction Inc.)	$35.67	$29.74	-$606
October 4th, 2009	MT (Arcelor-Mittal ADR)	$26.25	$35.01	$920

The next meeting will be on Sunday, November 1^st, 2009. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com